Firms Need to Manage 'Outsized Moves' in Leveraged ETFs: Defiance CEO

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Watch Firms Need to Manage 'Outsized Moves' in Leveraged ETFs: Defiance CEO - Bloomberg on Dailymotion

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00:00Sylvia, this is a passively managed fund, but I look at the holdings, and as Katie pointed out,

00:04there are a lot of electric companies, construction companies, and you've got the chip makers as well,

00:09like NVIDIA, like Broadcom. What's the thinking behind the chip makers having a lower weighting,

00:1414 percent, versus machinery companies having about 22 percent?

00:19Yeah, well, so the thesis behind this ETF is that this is where the puck is going in AI. This is

00:23that next AI trade, right? So for anyone who thinks that AI might be crowded, this is where you should

00:28look, because it's going to take a lot to power data centers. It's going to take a lot to power the

00:32AI revolution. So McKinsey came out and said there will be 6.7 trillion of capex that's needed for

00:38this, and 5.1 trillion of that is going to be in AI. And it's mostly going to be around energy,

00:43renewable energies, you know, electrical grids, the kind of nuts and bolts that are required to

00:49power AI. But then the second part of it is obviously chips, right? You need chips to run

00:53the data centers. And so we wanted to include that to actually give a pure play for AI and power

00:58infrastructure. And it's interesting to that point to see REITs here as one of your smallest

01:04weightings in terms of industry groups, weightings that only has about 2 percent. It feels like a lot

01:09of folks have been looking for exposure to data centers and the boom that we're seeing there

01:13through REITs, not necessarily the CTF, though. Yeah. And so that's just a small part of this.

01:19I would say that the biggest chunk of it is you looked at some of those top holdings in there.

01:23You mentioned them like GE Vernova, Qantas services. You know, these are the names that

01:27are actually going to power the AI data centers. They're going to power the innovation behind AI

01:32and REITs are a smaller part of it. I think that they play more into the connectivity part of this

01:37equation. And so maybe investors who are looking for that exposure will will look there as well.

01:41I need to ask you about leverage single stock ETFs, because that's a space that defines as a big

01:46player in. And obviously, we've seen we just talked with Isabel Lee about how there are all these

01:51filings for five times leverage, three times leverage when that doesn't actually exist in the U.S.

01:58In terms of how far you can get with those kinds of filings right now, the government is shut down.

02:04So is there just no response? The issuers are just filing and throwing it out there and seeing what

02:10happens? Well, so to date, a lot of issuers have filed for different products, whether they're

02:15single name levered ETFs or other ETFs. And, you know, in terms of what has come to market,

02:21a lot of these filings are new. So we still have about 75 days or so before any of the issuers

02:26actually have to make a decision in terms of to bring it to market or not. And I think, you know,

02:30we're all kind of hoping that we get some SEC feedback and SEC back in office before that

02:35happens. So nobody's actually launched anything without the SEC's blessing, to my knowledge.

02:40And we did hear Kevin Hassett on CNBC this morning saying that perhaps the shutdown

02:44will end this week. That's a big if. But of course, 75 days is a long time. I am curious,

02:50though, you think about the experience of the Granite Shares product that was listed

02:54in Europe. That was three times inverse exposure to AMD, basically forcibly having to liquidate and

03:01delist. And I wonder, you know, as you're putting together these filings, I know there's not much you

03:05can say specifically about an active filing. But when you're thinking about new products that you might

03:10ask for permission for, seek to launch, how much are you thinking about potential blow up risk?

03:16Well, I think any issuer that works with levered inverse products has to think about this. And you

03:21have to have a plan for outsized intraday moves that, you know, in your last segment, I heard you

03:25say, if you have a 20% move in a 5x fund, you wipe out the whole fund, right? So we're very much

03:32aware of the risk of the products and the different mechanisms that we have in place in order to manage

03:37the product should that happen. And if you notice with the defiance filings, it's target, right? The

03:42word target is in there for a reason. So there may be a day where actions have to take place to

03:47preserve the fund for for the investor and essentially not wipe out the fund in the event

03:52of a sizable move. And so what I would say is most of our peers and competitors have a similar type

03:57of strategy in place. I don't think, you know, we're looking to have those types of outsized moves

04:03to wipe out a fund. It very much feels like these leveraged single stock ETFs are targeted for retail

04:07investors who have taken on, you know, this class of funds with a lot of gusto. But if retail

04:12investors go dormant, would institutional investors be able, be willing to pick up the slack?

04:17You know, just looking at the different trading activity across the levered and inverse funds. Yes, there's a lot of

04:22popularity in the retail sector, but there is an equal or higher amount of interest and trading that happens in the

04:30institutional space, whether it's high frequency traders, hedge funds, our desks. It's still very much an

04:35institutional play. It has just attracted retail. And what I would say is not all retail is the same. Like there are

04:41these very sophisticated day traders out there that are comfortable with leverage, have used higher leverage points with

04:46things like futures and ETNs and such in the past. And so, you know, they tend to understand the risks of these products. All of

04:52that is very public and out there. And, you know, we want to make sure that those messages are out there too for the average retail

04:57investor.

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